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Updated from 9:45 a.m. EST

Cap Gemini

agreed Tuesday to acquire the consulting and information-technology services business of

Ernst & Young

for 11.5 billion euros, or about $11.2 billion, in a deal that would significantly expand the French management consultant's presence in the United States.

The revenue base of the combined companies will now be 36% in the United States and Canada, from just 13% for Cap Gemini alone. "That's in line with the market demographics in the IT services business," said Mike Meyer, chief executive of

Cap Gemini America

, in an interview. In addition, Cap Gemini's "very, very small" revenue base in the German-speaking countries of Germany, Switzerland and Austria will now grow to 5%.

The acquisition also frees up Ernst & Young from potential conflicts of interest between its auditing and management consulting businesses. "This breaks that chain," said Dale Wartluft, a senior vice chairman at Ernst & Young responsible for consulting services in the Americas.


Securities and Exchange Commission

has been highly critical of such conflicts. Just last month, an independent consultant to the SEC issued a

report that said


employees overwhelmingly failed to disclose violations of independence rules. The SEC has also encouraged the Big Five accounting firms to separate those businesses; Ernst & Young would be the first to spin off its lucrative consulting business.

Under the terms of the agreement, Paris-based Cap Gemini will issue as many as 43.5 million new shares and pay 375 million euros in cash.

The consulting businesses of New York-based Ernst & Young covered in the agreement are located in the United States, Canada, Britain, Germany, France, Spain and Italy. Over the next few weeks, Cap Gemini expects additional businesses to be included in the agreement, including ones in Sweden, Norway, Finland, Denmark, The Netherlands, Belgium, Australia and New Zealand.

Completion of the deal is contingent on the approval of Ernst & Young's partners, who will vote over the next few weeks, with results ready by April. Wartluft of Ernst & Young said in an interview that the likelihood of rejection by the 4,000 Ernst & Young partners is "slim to none." Cap Gemini shareholders will consider the acquisition at an extraordinary meeting by the end of June.

Cap Gemini expects the transaction to add to earnings per share from 2000 onward.

Cap Gemini said Ernst & Young's consulting business booked revenue of 3.5 billion euros in 1999 and boasted 18,000 employees. Together, they will have revenues of 8 billion euros and 60,000 employees. Few layoffs are anticipated. "This is a services business. Unlike in manufacturing, we're in the business of growing headcount," Meyer of Cap Gemini said. "There are no planned layoffs as a rationale for cost savings."

The two companies will be well-placed to benefit from the explosive growth in the e-commerce business, which is projected to reach $300 billion by 2003. Already, pro forma revenues from e-commerce consulting for the two companies in 1999 was "well over 1 billion euros," Meyer said.

Also, this transaction would not preclude further acquisitions. "We anticipate the continuation of growing our global capabilities," Wartluft said. Revenues for the combined companies in other regions would be as follows: France 16%, Britain 15%, Benelux 12%, Nordic countries 7%, Southern Europe 5% and Asia 3% to 4%.

Both looked at other potential partners, with Ernst & Young on the lookout for a couple of years. Meyer said that to the best of his knowledge, Cap Gemini did not speak with any of the other Big Five firms.

Shares of Cap Gemini closed trading on the Paris bourse Tuesday up 29.5 euros or 12% to 286.